Lower margins are tied to companies’ climate performance rather than to low-carbon assets

Summary: Lenders are likely to face significant financial risks from the shift to a low-carbon economy, but it remains unclear whether such risks are incorporated into their lending practices. The extent of this risk depends on whether banks incorporate such risks into their lending activity and whether financial instruments’ tenors are long enough to cover the period when such risks materialize. Using a case study of shipping loans, we combine quantitative data and semi-structured interviews with key shipping debt providers. Our results show that banks, in particular signatories of the Poseidon Principles, a voluntary disclosure initiative in shipping, have started to price in the climate score of shipowners they lend to after the Paris Agreement but on a corporate rather than an asset basis. However, signatories do not differentiate their margins based on a ship’s carbon intensity, despite a relatively long loan maturity, reinforcing the limitations of disclosure initiatives to influence investment outlays. Science for society: This study explores how the climate performance of a borrower and of an asset financed affects the cost of debt by using a case study of shipping loans. The study highlights that although some banks reward companies with high climate scores, they do not distinguish loan terms based on individual ships’ carbon intensity. Furthermore, despite initiatives like the Poseidon Principles, by which lenders disclose the carbon intensity of their shipping portfolio, the expected reduction in financing costs for greener ships has not been observed. The findings suggest that strengthening disclosure initiatives and implementing regulatory measures could better align the financial sector with climate goals. Public financial bodies can also play a crucial role by providing direct support for cleaner assets. By addressing these issues, the study offers pathways to enhance the financial sector’s role in achieving decarbonization, ultimately contributing to global efforts to mitigate climate change.